Business Cases: What, Why and How

Business cases are essential to good business decisions and IT success. They provide the foundation for informed decisions about what to fund, what to cut and how to set IT priorities. Moreover, they help set corporate expectations by accurately stating the benefits that will result from new programs.

Many IT organizations resist building business cases. A familiar excuse is that they are just too much work. Developing and using business cases requires significant time and effort. Bruce J. Rogow of Vivaldi Odyssey and Advisory estimates that a comprehensive business case costs between one quarter and three quarters of 1% of a project's total development cost. Although this may appear to be expensive, it's much cheaper than taking a massive write-off down the road.

Some organizations argue that business cases aren't applicable to their industries. In fact, business cases are crucial to every industry, including government and the nonprofit sector. Every organization needs a consistent way to evaluate potential investments on the basis of data and reason, rather than on passion alone.

Business cases come in various shapes and sizes. At minimum, an effective business case does the following:

• Defines the problem and the proposed program's objectives and scope.

• Describes business and technical assumptions and alternatives considered.

• Provides estimates for resources, scheduling and costs.

• Describes major development and operating risks.

• Quantifies tangible benefits and describes intangible benefits.

• Predicts financial return.

Use the following guidelines to get the best results from your business cases:

Establish a template. Everyone has a favorite business-case format. Unless a single corporate-level template is mandated, making true apples-to-apples comparisons becomes difficult, if not impossible.

Assign responsibilities appropriately. IT shouldn't prepare a business case by itself. The cross-functional team should establish the project objectives, scope, major assumptions and risks. The executive sponsor must quantify the project's benefits. Finance should provide standard costs for each IT activity and resource (programmer/hour, gigabyte/month and so on). IT needs to define the technical approach, resource requirements, schedule and cost.

Estimate costs and benefits accurately. Accurate estimates depend on thorough research, standardized estimating guidelines and a consistent cost structure. At one of my client companies, two groups calculated hourly rates differently. One group simply divided programmer salaries by 2,080 hours at work per year. The second group combined salary, benefits and occupancy costs, then divided by 1,700 productive hours. This resulted in a more accurate but much higher figure. On the surface, it appeared that the first group could deliver its projects less expensively, but that was blatantly untrue.

Centralize the evaluation process. CIOs need consensus and support from other executives to set IT priorities successfully. This must come from one centralized executive group. Surprisingly, many companies have no such group or, worse yet, have multiple groups with overlapping or conflicting responsibilities.

Fund all projects from a single pool of capital. Many companies separate IT capital from "plant and equipment" capital. Sophisticated companies take the shareholder's perspective and allocate investments from a single pool of capital, forcing IT to compete for funding with all other proposed investments.

Establish monitoring processes. An internal audit can provide an objective assessment of program progress during development and installation. Organizations must be willing to cancel programs that get too far off-track.

Demand accountability for benefits. Ensure that the promised benefits are realized. Benefits are unlikely to be achieved (or even monitored) unless an individual is held personally responsible. Savvy companies link the executive sponsor's annual compensation to achieving the promised benefits.

With comprehensive and accurate business cases, your company can make informed trade-offs and agree on IT priorities. Most companies fund all regulatory compliance first. Normally, they next fund programs with the highest return on invested capital. (There are exceptions. Companies occasionally choose to fund long-shot, high-risk, high-payoff programs. Nonprofit organizations may fund programs that further their mission even if they increase costs.) Companies use different priority-setting approaches, but it's crucial to have a consistent and clearly understood way to prioritize all proposed investments -- and then use it faithfully.

Business cases enable you to compare projects objectively, so you can undertake them in the order that provides the highest benefit to the company. Use your business cases to make good decisions that will result in corporate success.

Bart Perkins is managing partner at Louisville, Ky.-based Leverage Partners Inc., which helps organizations invest well in IT. He was previously CIO at Tricon Global Restaurants Inc. and Dole Food Co. Contact him at BartPerkins@LeveragePartners.com.

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